The link provided me the first clear explanation of why the problem has spread beyond the sub-prime mortgage market and into more conventional mortgage debt, as well as corporate notes. Thanks, Jack.

There is a silver lining in all of this, though - I've stopped receiving spam and junk mail pushing "easy refinancing".

Banks and thrifts (like WaMu) will continue to underwrite mortgages in order to maintain their revenue and market share. True, they have increased their credit standards (including credit score and income ratios) and decreased their loan to value parameters now that "stated income" collateralized debt buyers have quit buying.

Credit worthy buyers will still qualify for mortgages they can afford, albeit at higher interest rates (mainly because long term loans are no longer being financed at short term interest rates). Why? Because longer maturities carry greater interest rate/inflation risk).

This represents a return to rational pricing and an end to "fog the mirror" underwriting standards. That may produce a short term shock to speculative and highly leveraged real estate "investors" but shouldn't preclude owner occupied buyers from getting a loan that they can afford to repay.

The bird-dog mortgage brokers who weren't concerned with the buyer's ability to repay are done. If you have bad credit or income which fluctuates then you will be paying 3-4% higher rates than a highly qualified borrowers. You will also need a larger downpayment and/or private mortgage insurance. Why? Because of the greater risk of default.

Is this the beginning of the end of Homer, Tram & the streetcar guy?

PS: Whose property tax is going to pay off all those bonds that built the SoWhat's streets & parks?

Who is going to cough up millions for the freeway connection that PDOT swore would not be needed because they would not be many cars in the SoWhat?

Thanks
JK

"mortgages they can afford "

How about houses that people can afford?

Just use a Capitalization Rate for rental property with monthly rental multiplied, for a rule of thumb, by 120 to calculate price. Most of the excess price is neither investment nor rational (nor lawful, if tied to lending covered by 18 USC 1014).

Incorporate by reference comments to "Public Interest Comment on Subprime Mortgage Lending:"

See particularly Margin: Borrowing Money To Pay for Stocks

Do easy money terms on lending cause prices to go up? Of course it does. The entire set of so-called professionals should get bit by 18 USC 1014 as far as I am concerned.

And -- this is heresy in the entire scam -- don't let the "seller" of overpriced homes run off with all their cash proceeds until the price has seasoned for perhaps five years. The sellers are the ones that took the mortgage money that the mortgage buyer (using Mister Tee's definition, rather than lender) purchased.

If prices move lower toward a natural equilibrium with wages then this would be a good thing. Not a reason to inject newly minted money, unless spent building unneeded projects like Crown Point or some such stuff that ultimately prove to have lasting value and create temporary jobs.

I'd ask Mr. Jumbo borrower for collateral other than the property. But then that would make me not a team player in the charade.

====

OMG - - I didn't know one could borrow against a hedge fund (usually a mislabeled two headed speculative fund) either. That gamble, for the lender, stretches fully to the point of insanity; way past any regulatory "unsoundness" consideration.

Imagine a margin call on home "owners" (gleeful, blissful mortgage document signors) that bought using borrowed dollars so as participate in the national pastime of treating homes just as if they were a contract in the commodities futures market? Who are you going to call? A ghost. A shadow. The private federal reserve.

==
JK,
If I were Auditor then Homer could kiss my ____!! Same too for all the lenders that didn't seek collateral other than future tax collections that are in any way dependent upon corruptly arranged disparity in tax collections.

It won't be the end of Homer and Dike. The eight amendments to the SoWhat fiasco allowed Homer/Dike to transfer their obligations for affordable housing, LID payments, tram payments, trolley payments, and to future project developments in SoWhat "to some future time". They are off the hook, plus what they have so far invested is mostly at other lenders risk. As they say, "They are out-a-here", just like Homer's Bend Broken Top and Portland Forest Heights.

The taxpayers are left with the obligations of the infrastructure costs, the trolley, the tram, the greenway, the transportation projects, the park, etc. Plus the remaining property owners will have the obligation of the LID's that will pay for a minor portion of some of these costs. Plus these property owners will have the additional cost of super inflated costs as Homer waves goodbye.

That is why the once $288M taxpayer costs without debt service and cost overruns on every one of the SoWhat completed/in progress projects will be costing the Portland taxpayers over $2.5 BILLION over a twenty year urban renewal life. Hang on, taxpayers; and keep wondering why our schools, roads, firemen, and police have budget "problems", according to Sam.

Just use a Capitalization Rate for rental property with monthly rental multiplied, for a rule of thumb, by 120 to calculate price. Most of the excess price is neither investment nor rational ...

In the past few years, rental properties in Portland have generally transacted at considerable premiums to this rule. The logic back of this was that there was considerable growth potential in the underlying asset, and you could recoup the investment in a couple years by flipping it. This faulty logic, apparently, was carried over to houses as well.

This current situation is very similar to what happened during the S&L crisis in the early 1980's. Lenders need to remember their history, not repeat it.

"OMG - - I didn't know one could borrow against a hedge fund (usually a mislabeled two headed speculative fund) either"

What does that mean?

"Hedge funds that owned those securities, and had borrowed against them, were asked to put up more money to secure their loans."

Read between the lines with an eye toward maximizing leverage any which way you can.

PDXNAG:

The hedge funds and other institutional investors (banks, insurance companies, pension funds) created the demand for subprime debt. The credit rating agencies facilitated the charade by granting generous credit ratings to large blocks of paper (thinking that only a small number of the block would default).

The mortgage brokers relaxed their underwriting standards because they knew it would be packaged and sold to investors(translation: they retained limited risk) and the game would have continued unabated if it weren't for stagnating/declining home prices and a return to a normalized yield curve (longer maturities carry higher rates than short ones).

That said, there is no "call" provision that would objectively force a homeowner to repay early....Except the obvious balloon payments, and the unknown rate/credit standards that would apply at the time the balloon payment is due.

It is likely to get worse before it gets better, unless the Fed wants to step in and start dropping rates all over again.
I would be surprised if Chairman Bernanke chooses to go that direction (for fear the inflation genie jumps out of the bottle).